#138 Groupon in China. No longer in the company of distinguished friends.
In February 2018, Chinese company Meituan became the world’s fourth most valuable startup. Meituan, now valued at $30 billion, originally started as a group purchasing platform, similar to Groupon, which had its stab at the Chinese market. Yes, Groupon. Let’s turn the clock back for a moment.
In mid 2011, American publication Forbes asked, “Can Groupon Succeed in China“? Apparently, only a few months after Groupon’s start in China, the media already saw coming what was unavoidable. Groupon entered China in early 2011. At that time, people at Groupon, but also the media must have assumed that the Chinese market was ripe for a proven, internet-based group purchasing platform. China’s internet population had grown to half a billion users, and its collective culture combined with the desire to drive a good bargain, seemed to be an ideal fit for Groupon’s model. Tech publication Venture Beat agreed: “China doesn’t kill foreign companies, foreign companies commit suicide in China”, so the author of a commentary, suggesting that Groupon could actually find its path to success in China. Groupon entered big – 3,000 employees in about 70 offices across China seemed to spell success. For a short time, at least. But then things deteriorated fast. In the very beginning, Groupon experienced several operational glitches that didn’t bode well for them. To begin with, one of Groupon’s local competitors owned the Chinese domain Groupon.cn forcing Groupon to adopt a Chinese name, “Gaopeng” for its China business. Then, after briefly being live for only a few hours during their launch, Gaopeng’s site went dark again. According to local regulators, the site didn’t possess a necessary license. And then came Groupon’s American Superbowl ad whose cultural insensitivity was simply mind boggling. The ad, a completely misguided spoof managed to infuriate both parties on the side of the China-Tibet issue. It didn’t exactly help to raise Groupon’s standing in China. By mid-2011, only a few months after the launch, there were already dozens of competitors, and despite all efforts and significant investments, Gaopeng came in only 10th in terms of deal volume. By August 2011, Groupon had closed 13 of its offices and fired hundreds of employees in successive rounds of layoffs. Groupon simply made the same mistakes that many foreign entrants make in China. To begin with, they almost exclusively hired foreign managers to run their China operations, and ignored the importance of local talent. To make things worse, they hired consultants and investment bankers with MBAs instead of sales- and growth focused minds. Driven by the need for speed and efficiency, they imported tactics that had worked in the US and other markets with a total disregard for local consumer behavior. For instance, Groupon engaged in mass email marketing, ignoring the fact that Chinese consumers prefer instant messaging over email. Most importantly, Groupon completely ignored the competitive environment. When they entered China, competition in the group purchasing segment was already highly fragmented. This resulted in vendors having the upper hand and laughing at Groupon’s insistence to take 50 percent of the profits. Commissions ultimately came in at just about 11 percent. In the first 9 months, Gaopeng had accumulated losses of close to $50 million on revenue of only $2 million. By 2012, Groupon started to quietly slip away and withdraw from China.
To their credit, when Groupon first entered they understood that they needed a Chinese partner, and they went with Chinese Internet giant Tencent. Unfortunately, the two partners had differences over strategy: Groupon wanted to grow fast to increase the company’s valuation for its upcoming IPO, while Tencent had an interest in sustainable growth tactics. Groupon clearly saw Tencent only as a door opener and investment partner, but never considered asking them for strategic guidance on the Chinese market. They just knew better…! Eventually, Tencent turned their backs on the Americans and focused on companies that were direct and indirect competitors of Gaopeng.
Here’s a fun fact at the end: “Gaopeng” is a part of the Chinese proverb “gaopeng manzuo”, which roughly translates into “being in the company of distinguished friends”. There’s nothing distinguished about Groupon’s China entry. And it doesn’t have friends there anymore either…
March 14, 2018 @ 1:36 pm
Groupons decision to enter the Chinese market was not bad in general. Related to the four stages of systematic international market entry, Groupon was ready to enter the Chinese market in my opinion, they “just” failed to execute it. But let’s brake this down quickly:
– Corporate readiness: Groupon was big and mature enough; they have entered many different international markets before and therefore had enough international experience.
– Product readiness: The product was ready too. The concept was proven successful internationally and they even have learned to adapt it slightly to answer local needs if necessary.
– Target market selection: China is a challenging market for companies from abroad, but the market offered a lot of potential to the concept of Groupon. It was promising but had challenges and risks attached to it as well.
– Entry mode choice: They have chosen a local partner and started big to cover as much of the market as possible. An expensive and ambitious approach, but for the product and market the right choice on first sight.
But where did they fail then, when the initial position was so promising? I think they have made four major mistakes:
1. They were not properly prepared when they went live and learned about local laws and regulations the hard way when their website was shut down shortly after the launch.
2. They evaluated the opportunities and risks wrong: Yes, the market offered a lot of potential, but competitors with similar strategies were already present. Commissions as Groupon was used to get elsewhere were not realistic in China.
3. They failed to adapt to local needs and cultural differences. Choosing different marketing channels for example would have been easy to apply without changing the product itself.
4. Lastly, they have failed to listen to and profit from their local partner. If Groupon would have worked together more closely with their local partner and relied more on local talent, all failures described above could have been avoided.
I don’t think that the Superbowl-ad really was a crucial success factor, but it surely was very bad timing for the launch in China – and marketing fail in general of course.
July 7, 2018 @ 1:53 am
When I read the title of this article, I kept thinking about what gaopeng.com was. In fact, as a Chinese, I have no impression of this website, which makes me curious. As I read on, I realized that this is Groupon’s group-buying site in China, a joint venture between Groupon and Tencent. We all know that Groupon is a group-buying site, and it’s highly recognized in the United States. But in China, if you talk to Chinese people about group-buying websites, I’m sure most people will tell you about a company called Meituan. Indeed, as mentioned at the beginning of the article. In February 2018, Chinese company Meituan became the world’s fourth most valuable startup. Meituan, now valued at $30 billion.
With the development of China’s Internet market, many overseas enterprises are attracted by China’s market. These enterprises enter China and hope to achieve good results. But the reality is that few overseas companies can grow in China. As mentioned in the article, “China doesn’t kill foreign companies, foreign companies commit suicide in China.” I think Groupon suffers from the issues like trouble on operating or force to change their domain name in China, those are not a big deal. In fact, Groupon’s ads about the China-Tibet issue is a big problem. I am very concerned about the involvement of business companies in sensitive political issues, which in my opinion is totally unnecessary trouble. Moreover, the Chinese market is a policy-oriented one, which is completely different from the relatively market-oriented western market. Therefore, angering the Chinese government is not conducive to Groupon’s development in China.
In addition, Groupon has not been well localized in the process of entering China. Groupon employs foreign managers to manage its business in China, and uses the same marketing tactics as in the United States. These practices completely ignore the preferences of Chinese consumers and the characteristics of the Chinese market. I believe that these wrong entry strategies led to Groupon’s failure in China. I’ve always believed that companies need to respect their consumers and their markets. In many cases, arrogance can ruin our businesses.
The last thing I want to say is that Groupon’s partnership with Tencent is one of the best things about its strategy to enter China. Tencent is currently the most powerful Internet company in China. I believe that having a strong local partner will reduce many obstacles for the business. Unfortunately, the two partners had differences over strategy. As mentioned in the article, “Groupon clearly saw Tencent only as a door opener and investment partner, but never considered asking them for strategic guidance on the Chinese market.” In my opinion, Tencent is the best guide, but Groupon missed the opportunity to ask. All in all, I believe that more overseas enterprises will enter the Chinese market in the future and I wish them success. The most important thing is not to forget the lessons of failure.
September 5, 2018 @ 6:37 pm
This is an interesting case study. In almost every important element of a market entry strategy, Groupon failed. As China is a more collectivism society than the Western individualistic mindset, once Groupon began to fail and customers began to flee, it became a snowball effect as friends and family follow their example. To highlight a another point, Groupon used the western business strategy of email marketing, but more Chinese use social media and text messaging. This means that money was spent marketing in the wrong channel (Webpower, 2017).
It’s essential that organizations looking to expand in foreign markets invest in understanding the culture and social norms. This involves hiring local people to gain insight, finding the correct local partners to help navigate the environment, and not expecting that the current ways of doing business in the west will automatically translate into that foreign market. Could Groupon have avoided some of these pitfalls if they chose a different entry mode choice? Perhaps a greenfield investment strategy would have been a better option to leverage the local environment, gain access to resources, and other incentives not otherwise offered to foreign companies (Apfelthaler, 2017). This approach may have taken longer to set up and may have resulted in lower revenue, but lower revenue is better than zero.
Expanding into China is not easy. There is a figurative graveyard of foreign companies that have tried and failed to gain a foothold in that country so Groupon’s success was never guaranteed. However, the missteps that Groupon could have avoided by utilizing a more studied and better executed market entry strategy may have netted them a slice of a billion-person economy.
Apfelthaler, G. (2017). International Market Entry Strategies, A Practical approach. Thousand Oaks, CA.
Why SMS is powerful and revolutionary in China. (2017, January 25). Retrieved from http://webpowerasia.com/why-sms-powerful-and-revolutionary-in-china/
September 30, 2018 @ 9:57 pm
Despite the volume of companies who have entered China before, Groupon appears to have learned little from other’s mistakes. Venture Beat’s quote is spot on “China doesn’t kill foreign companies, foreign companies commit suicide in China.” In this case, it seems Groupon checked all the boxes on how to get into China but were shortsighted in their approach of what to do once they got there. Groupon accurately assessed the readiness of its Company, Product, and Market Selection. They did enough research to be aware of barriers to entry and combat those by entering the market in a joint venture. However, their research fell short of identifying the desired customers’ cultural and consumer practices. Their choice to enter with a partner and access to Chinese employees should have provided a knowledge base or at least a resource against which to vet ideas. Unfortunately, they either didn’t establish, or failed to leverage, that type of relationship with their partner and lost out on an opportunity to gain knowledge about the market and competition. Groupon’s arrogance prevented them from seeking advice, which ultimately led to their suicide in China.
October 1, 2018 @ 1:16 am
Technology markets can quickly become crowded thanks to the rate at which internet companies, and clones, can be launched. But rushing into a crowded foreign market with a technology product that has succeeded in America, has spelled failure for more than one American company, Airbnb in Russia and Uber in China are additional examples.
The size of the Chinese market, with its enormous and growing millennial demographic, makes it particularly attractive for technology companies, but time and again, American internet companies have failed there.
Even companies that seem to achieve a successful entry, such as LinkedIn, eventually encounter difficulties that could be fatal. LinkedIn has been surpassed by a local competitor built on technology better designed for the Chinese preference for chat applications. Evernote, which remains hopeful about its prospects in China, recently spun off its China unit into a joint venture the company believes will be more nimble and better able to adapt to the preferences of Chinese mobile users.
Seeking and accepting advice from Tencent, an Alibaba Group Company, could have helped Groupon avoid some major errors, like their culturally insensitive Super Bowl ad. Groupon’s rush to open China offices that forced them to bring in foreign managers, while Tencent preferred sustainable growth.
Many technology companies choose a joint venture to enter or remain in the China market because local knowledge and relationships are so important for survival. But even if Groupon made a smart market entry choice, the company mismanaged the relationship, or, perhaps they chose the wrong partner. But the relationship with Tencent may have been doomed from the start. It appears Groupon did not obtain any sort of non-compete agreement. Tencent continued to invest in other group-buying sites and to operate a major competitor, so one must question their commitment to Groupon. There are other venture capital firms with experience in the Chinese tech market. A couple or American venture capital firms are currently working with Lashou, the Chinese competitor Groupon tried and failed to acquire.
With or without the advice of their partner, Groupon should have seen the lack of available talent as a market access barrier that would require an adaptation on their part. They assumed they could obtain the talent they needed by buying out a competitor, or by luring the best talent with high salaries, a tactic that had worked for them in other markets. They were undeterred even when Chinese group-buying sites formed a coalition and announced employees that left for Groupon would never be rehired by one of these local companies.
They also failed to accept that a product adaptation was needed. While competitors were offering 90% of profits to small businesses offering deals on their sites, Groupon’s insistence on 50% seems ridiculous. As a result, their sales team had to work hard to win customers, and small business owners reported feeling pressured.
Given these mistakes, it seems Groupon’s real problem was a lack of corporate readiness. While a third of the company’s revenue came from outside the U.S. at the time of its entry into China, the company was only two years old and run by its 30-year old founder. Perhaps a more mature leadership would have taken its time choosing a partner and utilizing that relationship to prepare its management team, hiring plan and product adaptations before diving into one of the most challenging markets in the world.
April 18, 2019 @ 7:18 am
This is a very interesting article. In November 2008, Groupon was founded. Ten years later, its imitator in China, Meituan, expanded its business boundaries and became a platform-based giant of pan-life services, IPO in Hong Kong. However, Groupon, the founder of the group buying model, has already faded away and experienced a serious share price decline and business contraction, and lost the position of market leader. Groupon in China hired people from local competitors with wages two to three times higher than the industry. If the person does not meet the company’s requirements or expectation, it will be quickly fired, which makes the employees quickly turn from the excitement of entry to the anxiety under pressure. I believe this human resource hiring practice is very harmful for the development of Groupon in China. In addition to the risk of employee being fired, Groupon’s slow progress in China and the delay in its business have made employees feel at a loss. The Groupon joint venture in China, which is strongly dominated by Germany team, who do not understand Chinese market, resulting in inefficient decision-making. The German leadership team has to investigate its basic issues such as sales volume, market share, and product quality, which has greatly slowed the cooperation process. It caused that Groupon China official launch was delayed. The Chinese market is new to Groupon, consumer discount is much lower than the 50% discount that Groupon insisted in the United States. Based on all these factors, it’s not difficult to understand Groupon’s unsuccessful experience in China.
April 20, 2020 @ 12:05 am
This shows how difficult it is to establish in countries where the customer exist, but the legal system does not support free market and foreign traders. Chinese law are heavily in favor of Chinese companies in order to always favor domestic solutions rather than foreign solutions. Although, Chinese open market approach has established to benefit people who are loyal to the system. Working with the aerospace industry taught me how many of those private enterprise in China actually owned by retired generals and party members benefiting from low interest government loan and access. Access is return on loyalty and obedience. In such market, it is hard to predict the outcome of entry regardless all of text book business analysis.
January 19, 2021 @ 10:17 pm
Greece, Turkey, Austria, Ukraine, Morocco, to name just a few countries where Groupon failed in recent years. At its peak, the company operated its business in more than 50 countries. Compared to today, this number has more than halved. In my opinion, this is not a coincidence, but a lack of leadership in the company’s management combined with a brittle internationalisation strategy. In the past, there have been several examples of Groupon’s standard market entry strategy of flooding into a market and expanding rapidly. In hindsight, these successful market entries were perhaps more of a stroke of luck than systematically planned. This raises the question of whether the company is ready for internationalisation? Well, looking at turnover as the main parameter, the company did a particularly good job between 2008 and 2016 – creating a business that was worth over $3 billion. Since then, revenue has fallen by almost a third. And thousands of people have lost their jobs, which does not necessarily show a high level of social responsibility. In summary, I assume that Groupon, although internationally active, is not ready for globalisation, especially in terms of organisational readiness.